Mumbai: The rupee weakened on Friday as a sharp sell-off in domestic shares coupled with demand for the US unit to swap for euros after the single currency’s global rally, weighed on the local unit.
Traders said dollar demand for some defence-related purchases also exerted downward pressure on the rupee.
The partially convertible rupee closed at Rs 45.37/38 per dollar, 0.3% weaker than its Rs 45.24/25 close on Thursday, when it rose as much as Rs 45.04 - its strongest since 4 January. The rupee moved in a wide band of 45.1425 to 45.44.
“I think the kind of volatility we saw recently will continue. Lots of things happening -- inflation, high interest rates, growth worries, among other things,” said Ananth Narayan G., head of fixed income, currencies and commodities at Standard Chartered Bank in Mumbai.
“Even if not directly, sentiment for capital inflows is pretty weak at the moment, including for further debt flows. Next week, sentiment will continue to be nervous, given all the above factors and the last-minute inflows into foreign institutional investors’ (FIIs) debt quota would also be over.”
FII limits in government and corporate debt were increased by $5 billion each to $10 billion and $20 billion respectively in September. The limits were allotted in December and will expire on 15 January.
Sensex posted its worst weekly loss in eight months tumbling to four-month closing lows in volatile trade on Friday, after accelerating monthly inflation sent financials lower.
Headline inflation accelerated in December on costlier food items, cementing expectations for another rate increase by the central bank later this month to cool spiralling prices.
FIIs are net sellers of $545-million worth of shares this year until Thursday, pushing the rupee down 1.5%. In 2010, record inflows of $29.3 billion had helped the rupee gain 4.1%.
“Not much of dollar supplies were seen today. Euro/rupee stops got triggered which pushed the rupee down,” said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
Traders said banks sold rupees to buy dollars, which were then swapped for euros, after the single currency’s global rally.
The euro hit a one-month high against the dollar on Friday, extending a rally due to tough talk on inflation from the European Central Bank and an easing of debt worries after solid bond sales by Portugal and Spain.
One-month offshore non-deliverable forward contracts were quoted at 45.64, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, MCX-SX and United Stock Exchange closed at 45.4650, 45.47 and 45.46 respectively, with the total traded volume on the three exchanges at an average $6.6 billion.